[This article was originally published as the cover story for the April 25th issue of HUMAN EVENTS newspaper.]
The World Bank and International Monetary Fund held their spring meeting April 14 to 18 in Washington, D.C. Both financial titans were created after World War II to foster economic cooperation and development around the globe. With 16.2% of the International Monetary Fund (IMF) shares, the United States is the largest shareholder among the 187 nations who belong to the fund—even though its managing director has always been a European.
Remote to most Americans, the IMF has been in the headlines recently because of its role as one of the financial rescuers of three European nations whose economies collapsed last year. Under Managing Director Dominique Strauss-Kahn (the former French finance minister, who is considered the leading Socialist candidate for president of France in 2012), the IMF has joined with the European Union to sculpt bailout packages for Greece, Ireland, and Portugal. Coupled with loans from the EU, the price tags on the bailout packages come to $157 billion for Greece, $122 billion for Ireland, and most recently, $116 billion for Portugal.
Obviously, these are quite substantial packages for the three economically devastated countries. They will become very relevant to U.S. taxpayers when they realize that, because we are the largest single contributor to the organization, and with Spain and Italy now on thin financial ice, cries for the U.S. to pump billions more into the IMF may soon be heard.
We’ve seen this movie before. In 2009, President Obama proposed and Congress approved a $100 billion U.S. loan to the IMF. Obama’s request came following the summit of G-20 nations (the world’s 20 largest economies and the European Union) April 2 of that year. At that meeting, there was agreement to enhance the fund’s “New Arrangements to Borrow” (NAB) facility. The NAB, which allows member countries to provide credit to the IMF to deal with globally threatening financial crises, had been, in Obama’s words, “woefully inadequate.”
Then the three European countries financially collapsed, and the IMF came to the rescue. Financial jitters still remain, and if you can believe it, there’s an ongoing discussion about how many more billions Uncle Sam (you!) should loan the IMF.
Boutros-Ghali’s Cry for Help
“If we are going to start including funds made available to Europe (more bailouts), then the IMF is not properly resourced,” said Youssef Boutros-Ghali, chairman of the IMF’s policy committee, on June 4, 2010. Boutros-Ghali also said that the member nations were talking about doubling the amount of SDRs (special drawing rights)—which, the IMF’s “Factsheet” defines as “an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.”
And this call came after the U.S. had increased its commitment to the IMF by $100 billion. Boutros-Ghali, Egyptian finance minister under President Hosni Mubarak and nephew of onetime United Nations Secretary-General Boutros Boutros-Ghali, resigned both his cabinet office and the IMF position after Mubarak relinquished the presidency earlier this year. His successor as chairman of the 24-member policy committee is Singapore Finance Minister Tharman Shanmugaratnam.
Nine months after Boutros-Ghali’s controversial statement, there is concern about another European economy failing and another cry for help from the IMF—and with it, appeals for more cash from the debt-wracked U.S.
One member of Congress who has expressed considerable alarm over this situation is Rep. Cathy McMorris Rodgers (R.-Wash.), vice chairman of the House Republican Conference and the premier congressional foe of spending U.S. tax dollars on IMF bailouts.
Last year, McMorris Rodgers and then-House Republican Conference Chairman Mike Pence (Ind.) introduced the European Bailout Protection Act, which would require that EU nations meet the fiscal requirements mandated by their own treaty before they could draw on U.S. contributions to the IMF. The two Republican lawmakers also introduced House Concurrent Resolution 279, which would put Congress on record as opposing U.S. participation in the European bailouts. Under then-Speaker Nancy Pelosi, however, the resolution was never brought to the floor for a vote.
In this session of Congress, McMorris Rodgers said, she is “closely monitoring the situation in Europe and is studying possible legislative remedies.”
“The Portugal bailout is half that country’s GDP—$116 billion out of $233 billion,” McMorris Rodgers told Human Events. “The IMF has refused to provide a reliable number but, given America’s contribution to the bailout, we estimate that our support of the package is equal to writing a check worth $600 for every man, woman, and child in Portugal.” She added that this ratio “was nearly identical for Greece and Ireland bailouts.”
The congresswoman went on to point out that both Spain and Italy are on “thin ice financially” and loom large as the next likely candidates for IMF rescue packages. And, McMorris Rodgers said, “A similar ratio for a bailout of Spain would be $725 billion, and for Italy, over $1 trillion.”
“And if Spain or Italy collapses, a bailout would be too large for the present $1.1 trillion EU-IMF fund, whose ratio is now one IMF dollar for every two EU dollars, and that would mean a much larger share from the United States.”
As if to assuage the doubts of McMorris Rodgers and other IMF critics, Antonio Borges, who heads the IMF’s European division, said at last week’s meeting that “this crisis is now, in many ways, contained, and it is contained to three countries, which are relatively small countries, and this is a very, very important point. . . . As long as we maintain the crisis within small numbers, small countries, a contained element, this is grounds for good optimism about the future, and this is extremely important.
“[T]he reason why the crisis is now much better contained to these three countries is that there has been a great deal of progress, in particular in Spain. Spain was in the same situation as the others a year ago. Today, it’s in a different world altogether, and the markets recognize this very well, which is extremely reassuring—not that the Spaniards have solved their problems, they have not, but that they are on the right track.”
McMorris Rodgers was not convinced. As she told Human Events: “Clearly, we hope that Spain doesn’t request a bailout from the IMF, but given the direction of IMF policy over the last year, it’s extremely likely. Let’s remember: One year ago, we were told that Greece wouldn’t need a bailout from the IMF. It happened. Then we were told that Ireland wouldn’t need an IMF bailout. It happened. Ditto for Portugal. Basically, it’s been a year of broken promises from the IMF and the European Union. Because Spain and Italy are afflicted with the same disease as the other three countries—too much government spending and borrowing—and since the Obama administration has made no attempt to protect U.S. contributions to the IMF, it would seem to be only a matter of time before Spain and Italy are standing in line for American tax dollars.”
‘Only Thing Too Big to Fail Is America Itself’
On the same week that the 187 member nations sent their representatives to Washington for the spring financial summit, the IMF delivered an unusually sharp critique of the American economy. According to the twice-yearly IMF Fiscal Monitor, the U.S lacks a “credible strategy” to stabilize its public debt, and is the only advanced economy to be increasing its underlying budget deficit in 2011.
Carlo Cottarelli, who heads the fiscal affairs desk at the IMF, told the Financial Times: “It is a risk that, if it materializes, would have very important consequences for the rest of the world. So it is important that the U.S undertakes fiscal adjustment sooner rather than later.”
At a time when the IMF gives less-than-stellar grades to the debt management of its largest shareholder, one wonders why the U.S. should be on the hook for other countries that are in desperate economic situations.
Moreover, this all comes at the point when Congress will soon have to vote on whether to lift the U.S. debt ceiling.
As Rep. McMorris Rodgers put it, “At a time when the U.S. government is borrowing $5 billion every day on top of a $14 trillion national debt, does it really makes sense for us to borrow even more money (much of it from China) to help bail out Europe? We cannot take the ‘too big to fail’ philosophy to a global level. The only thing too big to fail is America itself.”